On 8 March 2019 the Supreme Court General Assembly on the Unification of Judgments (General Assembly) concluded that penalty clauses agreed for the unjust termination of a fixed-term employment contract before its end date are valid and enforceable even if the contract is deemed to be of an indefinite nature due to a lack of objective conditions required by law to conclude fixed-term contracts (Decision 2017/10 E, 2019/1 K).
Fixed-term employment contracts (regulated by Article 11 of the Labour Act), are atypical and can be executed only in the presence of objective conditions, for example where the work to be performed is for the completion of a specific project or where extraordinary circumstances arise (eg, an employee's temporary absence for military service or maternity leave). Penalty clauses may apply if a contract is unjustly terminated before its agreed end date, provided that they apply to both employers and employees. Under the Labour Act, a fixed-term employment contract which lacks these objective conditions is deemed to be of indefinite term from the beginning. Even if the parties define a contract to be fixed term, this will not be binding and the contract type will be determined on the basis of the abovementioned conditions.
Indefinite-term employment contracts (which are the principal type of employment contract due to the protections that they provide to employees), cannot be terminated before a specified date as no specific employment term is established. As a result, this type of contract does not generally include penalty clauses for the unjust termination before a certain period. That said, parties to an indefinite-term employment contract may agree a minimum period in which the contract cannot be terminated. This type of contract forms another atypical type of employment contract and will be subject to the terms and principles applicable to fixed-term contracts until the agreed minimum term's expiry. Therefore, it is possible to determine a penalty clause for unjust termination before the expiry of the minimum period with this type of contract. However, it should always be kept in mind that these kinds of employment contracts are atypical and that there must be an explicit, written agreement that the contract includes a minimum term of employment.
The difference of opinion which led to the General Assembly's decision stemmed from the conversion of fixed-term employment contracts – which included a penalty clause for unjust termination before the agreed term – into indefinite-term contracts by law due to the absence of the objective conditions. According to the parties arguing that the penalty clauses were invalid in these circumstances, the prerequisite for the penalty – which is to work for a certain period – cannot be realised in an indefinite term, so a penalty cannot be applied for the non-existence of such a condition. Supporters of this view accepted that parties could agree on penalty clauses for indefinite-term employment contracts if they included a minimum term, but rejected the interpretation of the term in a fixed-term contract as a 'minimum term' following its conversion into an indefinite term contract, due to the lack of an explicit agreement between the parties.
The General Assembly decision examined this issue under the most basic principles of the Code of Obligations (ie, the freedom of will and contract). In this respect, the General Assembly first concluded that deeming a fixed-term employment contract to be of indefinite term due to a lack of objective conditions concerns only the nature of the contract. It further stated that where an employment contract is concluded with a fixed term and a penalty clause is agreed for unjust termination before the expiry of the contract, the mutual will of the employer and the employee is to provide job protection to the employee and provide assurances to the employer about the employee's performance of their work during the period specified in the contract. On this basis, the General Assembly opined that converting a fixed-term contract into an indefinite-term contract will not affect the parties' concurrent will.
Due to the binding nature of General Assembly decisions, penalty clauses agreed for the unjust termination of a fixed-term employment contract before its expiry will be valid and enforceable even if the contract is deemed to be of indefinite term due to a lack of the conditions required for fixed-term contracts.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
